While healthcare was one of the harder-hit industries from the COVID-19 pandemic, it’s also one of the most essential industries in our society. There’s no way around the fact that medical properties like hospitals, skilled nursing, and senior housing will continue to have a growing demand with the population of adults age 65 and older expected to increase by 44% over the next 20 years.
While there are a lot of great options to invest in given this increased demand through healthcare REITs, the three that stand out as having the greatest upside potential for investors right now are Medical Properties Trust (NYSE: MPW), Omega Healthcare Investors (NYSE: OHI) and Sabra Health Care REIT (NASDAQ: SBRA).
Medical Properties Trust
Medical Properties Trust invests in hospitals throughout the United States, Europe, Australia, and now Columbia. The REIT leases these properties to operators on a net lease, which provides consistent income even while the healthcare industry is still facing trouble from the COVID-19 pandemic.
The REIT just increased dividends in February, giving its investors eight consecutive years of dividend increases. I would also expect to see more increases in the near future since the company is likely to see some significant revenue growth in 2021 versus previous years. The REIT made $3.4 billion in acquisitions in 2020, and many of these new properties didn’t start contributing to the company’s annual revenue until the fourth quarter. With the current dividend already being well covered at a 78% FFO payout ratio based on 2020’s financials, a further FFO increase in 2021 should make more dividend increases easy to justify.
Omega Healthcare Investors
With a dividend yield currently sitting at 7.15%, Omega Healthcare Investors can add some nice dividend income to a REIT portfolio. The high dividends aren’t the only thing this company has going for itself, though.
Omega’s revenue is well protected across its 945 properties, which are mostly skilled nursing facilities. These properties are triple net leased with fixed rent payments and annual escalators, and 96% of their revenues are tied to a master lease. Since the operators that are leasing these properties are receiving payments from Medicare or Medicaid for roughly 89% of their residents, their rent payments should remain well covered.
Omega Healthcare Investors has done well for investors over the years, with 17 consecutive years of dividend increases and an average annual total return of 13% over the past 10 years. With the company’s shares trading at a price/ FFO multiple of around 15x so far in 2021, its price still has a lot of room for growth in the near term, especially since the dividend yield is still so high.
Sabra Health Care REIT
Sabra Health Care REIT owns a portfolio of 426 skilled nursing and senior housing properties, with the majority being triple net leased to the operators. The company is also involved in a joint venture that owns 158 senior housing properties, which are managed by operators instead of leased.
The fact that Sabra has such a vested interest in the performance of so many of the facilities it has invested in, it has a better understanding of what’s impacting the industry on a daily basis. This gives the REIT a leg up on many other healthcare REITs that are also invested in senior housing and skilled nursing.
While the pandemic left Sabra having to make a dividend cut in 2020 from $0.45 per share to $0.30 per share, the REIT still has a very attractive dividend yield at 6.63%. While there’s no indication that dividends are returning to their pre-pandemic rates in the near future, I would expect to see them heading that way soon since the company has increased its dividends seven out of the last nine years. Buying Sabra at today’s price would mean a yield of nearly 10% if dividends return to $0.45.
The bottom line
While these three REITs have done well for investors over the years, they often go unnoticed because of the bigger companies like Welltower (NYSE: WELL) and Ventas (NYSE: VTR) getting most of the attention. All three of these healthcare REITs are positioned to grow over the next few years, so now is the time to get in before the attention starts to shift their way.